Understanding Venezuela's Nationalization Plan

In January of 2007, President Chavez announced the nationalization of three key industries: electricity, telecommunications, and strategic oil operations. These areas encompass much of the infrastructure essential to national development in Venezuela. Past private ownership in these industries made them insufficiently responsive to domestic needs, and the new nationalization plan aims to rectify this imbalance.

Though often mischaracterized as a government expropriation campaign, Venezuela’s nationalization plan involves due respect for property and investor rights. According to a Houston Chronicle article, "Chavez… is not nationalizing the entire economy without compensation to companies… but rather is buying back a few key strategic utilities such as the CANTV telecommunications company or taking a majority government share in four heavy oil projects in the eastern Orinoco River basin…[Chavez] insisted Venezuela does not plan to copy the Soviet or Cuban model of complete state dominance of the economy. "[1]

Economists and development experts have noted that the switch from private to state ownership can improve efficiency and broaden access to services. Joseph Stiglitz, former World Bank chief economist, told a Colombian radio station in an interview that "national industries can be very successful."[2] He cited the social security system in the U.S. as an example. In fact, in many countries, state-owned companies frequently partake in economic sectors such as utilities, transportation, and other essential services.

The Lessons of History

State control of key sectors of the economy and companies providing basic services is not a new phenomenon in Venezuela. In fact, privatizations are the more recent trend. For example, the phone company CANTV became privately run for the first time as recently as 1991, and the steel industry ended 23 years of national control with its privatization in 1998. Unfortunately, policy-makers and executives too often favor prevailing trends as the only acceptable policy options.

The Venezuelan oil industry was nationalized in 1976, and state oil company PDVSA was created to direct revenues toward national development. However, as former PDVSA advisor Bernard Mommer has pointed out, oil executives began to seek greater independence from the Venezuelan state not long after nationalization. Investments were shifted away from non-oil development projects benefiting the national population, and by the time Chavez was elected in 1998, PDVSA’s directors were aiming to re-privatize the company and cut formal ties to the state.[3] Nationalizations today will ensure a long-term and large-scale redistribution of state profits through increased social services and public aid programs.

The Legal Framework

The nationalizations will occur during the 18- month period in which Venezuela's Enabling Law is in effect. This law grants the president the power to issue decrees in 11 specific areas of government policy and was approved in a public session of the National Assembly in January 2007, with the stipulation that all decrees issued under the law must be approved by the legislature and may be rescinded in popular referendums called by 5% of the voting public. Enabling powers are a frequently used executive mechanism that have been employed by Chavez and his predecessors in accordance with Venezuelan constitutional law.

Moving Forward Through Negotiations

One key feature of Venezuela’s nationalization process that has been highlighted by the government is just compensation for private property. A member of the National Assembly Finance Committee member stated that, "Confiscation, expropriation are banned words in our dictionary… We will be tough but fair negotiators. There are legal mechanisms in the Constitution that give support to our plan."[4] Moreover, constitutional guarantees for private property specifically dictate that shareholders in private companies must be compensated.

Improved efficiency and access to services are among the chief goals of the nationalization plan. Domestic markets for electricity, telecommunications, and oil will be well served by the changes, which involve a mixture of public and private ownership that allots the government a dominant voice in these strategic industries. This way, Venezuelan citizens may enjoy the full benefits of national sovereignty over resources.

Case 1: Telecommunications

While under private ownership, the phone company CANTV concentrated its operations in Caracas, ignoring much of the infrastructure needs of the rest of the country. Under national control, CANTV may expand telecommunications networks to all parts of the country – including fiber-optic cables for internet access – thus creating more favorable conditions for social and economic development in rural areas. Also, workers will be better served by the change; pension guarantees long demanded by employees will become a reality under new ownership.[5]

Case 2: Strategic Oil Operations

The Venezuelan government is seeking negotiated settlements with all private companies presently involved in oil operations along the Orinoco Belt. As well, state-owned oil company PDVSA will assume a majority share of the reserves without putting an end to private investment in this profitable region. Negotiations are expected to be successful: oil industry analyst Patrick Esteruelas has said that, "A large majority of investors in Venezuela's heavy oil projects are expected to abide by new tougher terms to ensure future revenues… the incentives to remain are still strong."[6] In April a ConocoPhillips executive expressed confidence that his company can count on full compensation from PDVSA.[7]

Case 3: Electricity

Negotiations between the Venezuelan government and the largest electricity company in the country, U.S.-owned Electricidad de Caracas, lasted only a month. Company executives accepted the terms of the sale of its shares proposed by the government and noted that, "it has been a fair process [that] respected the rights of investors."[8]

[1] “Chavez as Castro? It’s not that simple in Venezuela,” Houston Chronicle, February 6, 2007. http://www.chron. com/disp/story.mpl/editorial/outlook/4532139.html

[2] http://www.caracol.com.co/noticias/386302.asp?id=386302

[3] Bernard Mommer, "Subversive Oil," in Venezuelan Politics in the Chavez Era: Class, Polarization, and Conflict, Ellner and Hellinger eds., Lynne Rienner, 2003.

[4] "Venezuela to Pay Companies in Nationalization Plan," Bloomberg, April 16, 2007.

[5] "Chavez says he is ready to transform Venezuela," Associated Press, January 10, 2007.

[6] "Venezuela: Orinoco's Future," Latin Business Chronicle, May 19, 2007.

[7] "No threat to Venezuela compensation, says ConocoPhilips chief," Houston Business Journal, April 18, 2007.

[8] "Venezuela to Nationalize Power Company," Natalie Obiko Pearson, Associated Press, February 8, 2007.